Lending money to a friend? Look out!

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PHOENIX - You've heard the old adage, money and friendship don't mix.

“Whenever money is joined with a relationship or a friendship you know that it's going to be difficult,” etiquette expert Nancy Mitchell explained.

But with millions of Americans hit hard by the recession's wrath, and banks tightening their lending, you may find it hard to say no to a friend, or a family member, in need.

“I've seen some people in some serious debt because they have loaned so much money out to their family and friends because they felt so bad,” financial planner Michelle Evard said.

Evard explained whether approached for $50 or $5,000, it's crucial to stop and think about your finances first.

“So, I think there's a point where you're being nice, but if you're hurting yourself in anyway and compromising some of the goals that you have for your life, I definitely don't think it’s a good idea,” she said.

If you do decide to lend, Evard stresses the importance of drawing up a formal agreement that clearly states terms of repayment.

“Signatures, the date, so each person should get a copy, a signed copy, and it should be the amount, the interest rate, and the time.”

And she offers an important reminder come tax time:

“If somebody's paying you interest, you have to go claim that on your taxes as income,” Evard said.

Also, Nancy Mitchell says it's perfectly polite to say no, or ask your borrower to pay up.

Because the loan may be a personal favor, but in the end, it's still business.

“Weigh your options, know the person's track record, and then proceed with caution,” Mitchell said.

Click here for an example of what your loan agreement should look like..